Wells Fargo Upgrades Kate Spade (KATE) to Outperform
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Wells Fargo upgraded Kate Spade (NYSE: KATE) from Market Perform to Outperform and raising their valuation to $23-$24 from $16-$18. The analyst said 2nd-half acceleration potential creates a compelling risk/reward profile.
Analyst Ike Boruchow commented, "· Following a tough Q2 print (where comps missed and FY guidance was cut), KATE shares have underperformed our group (-10% vs. group +2%) as investor skepticism has increased and the stock has been put into the “penalty box” (KATE also down 30% vs. group -4% since late April). We feel that this has created a compelling entry point, especially considering that several drivers of their Q2 miss were execution (transition to Cameron, miss in novelty), while our QTD checks imply a pick-up in trends (improved product reception, increased flash sales). Our view on the LT margin opportunity also remains intact (20%+ EBITDA margins still appears achievable via sourcing, licensing and scale). Fact is, KATE has seen some recent choppiness in fundamentals over the past few months; however, 1) the brand is healthy (they continue to outperform peers and gain share), 2) top-line continues to outperform (we see 9-10% comps in 2H as reasonable), 3) margins should continue to move higher (12.5% EBIT margins remains 6-8 points below accessory peers) and 4) we believe valuation is extremely compelling here (just 7.0x EV/EBITDA on 2017 numbers – including benefit of NPV of $739 million NOL balance). All in, we see renewed top-line momentum entering 2H (see comp acceleration), with upside optionality for holiday (begin to lap tourism/outlet headwinds and see lion’s share of sourcing benefits in Q4) with a stock trading at a very attractive multiple (a 30% discount to the group despite KATE’s 25% bottom-line growth profile) - creating a favorable risk/reward setup from here. We are raising our valuation to $23-$24 from $16-$18 based on an EV/EBITDA valuation of 9.0x 2017E EBITDA."
Shares of Kate Spade closed at $18.38 yesterday.
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Create E-mail Alert Related CategoriesAnalyst Comments, Analyst PT Change, Hot Upgrades, Upgrades
Related EntitiesWells Fargo, Ike Boruchow
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